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CIBC warns of $2.25 gas

It's going to cost Canadian drivers about $80 to fill the gas tank of an average-sized car or SUV this summer and more than $135 within four years, warn economists from one of Canada's biggest banks.

(RICK BOWMER / AP FILE PHOTO)

Thu., April 24, 2008

CALGARY – It's going to cost Canadian drivers about $80 to fill the gas tank of an average-sized car or SUV this summer and more than $135 within four years, warn economists from one of Canada's biggest banks.

National average gasoline prices, now about $1.23 a litre, will top $1.40 a litre this summer and $2.25 by 2012, according to a forecast from CIBC World Markets, which says tighter supplies will drive crude oil over US$150 a barrel by 2010 and to US$225 a barrel in four years.

With an average tank holding about 60 litres of fuel, Canadians will be digging deeper into their pockets to gas up their vehicles. And with the economy slowing down because of a looming recession in the United States, consumers will feel the pinch.

"The economy is slowing, so the rising gasoline prices are going to create a far greater problem than anticipated," said Dan McTeague, a Liberal MP from the Oshawa area in southern Ontario and a longtime gasoline price watcher. "This is going to damage the economy."

Thursday's report from economists at the investment banking division of Canadian Imperial Bank of Commerce coincided with news that Bank of Nova Scotia's commodity price index jumped by five per cent during March to its third record high in as many months.

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That report shows that rising energy costs – caused in part by soaring demand for oil from Asia and worries about supply reductions – will continue to drag down the economy.

"The oil and gas index soared by 11.8 per cent in March, climbing above its previous peak in October 2005, and will rise further in April," said Scotiabank economist Patricia Mohr.

In the United States, pump prices of regular gas jumped 2.3 cents Thursday to US$3.556 a gallon – or 93 cents US a litre – according to a survey of stations by AAA and the Oil Price Information Service.

North American gas prices have risen sharply in recent days partly because refiners have been switching over from selling winter grade gasoline to the more expensive but less polluting form of the fuel the government requires them to sell in the summer. That process, which made winter grade fuel more scarce, is nearly complete now, suggesting that price increases could slow.

"That was probably why... you saw (prices) accelerate so quickly," said Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service in Wall, N.J. "No, don't get used to these crazy increases."

At CIBC World Markets, chief economist Jeff Rubin – one of the first to predict $100-a-barrel oil, which he did three years ago – updated a forecast he issued in January saying oil would hit US$150 a barrel within four years, raising that projected price by $75.

Rubin said his group has "re-examined our projected supply increases" to discount expected rises in production of natural gas liquids, which he said account for virtually all the growth in global petroleum liquids production since 2005.

Gas liquids, "while valuable hydrocarbons, are not a viable substitute for oil and cannot be economically used as a feedstock for gasoline, diesel or jet fuel," the new report says.

"Stripping out natural gas liquids, oil production has not grown for over two years, which certainly goes a long way to explaining why oil prices have doubled over that period," Rubin said.

"Whether we have already seen the peak in world oil production remains to be seen, but it is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity."

At Scotiabank, the overall commodity index has climbed 181.2 per cent from its cyclical low in October 2001 – a stronger advance than the surge between 1972 and mid-1978.

Oil and mineral prices posted new highs in March, and crude oil has continued booming to a record of US$119.90 per barrel Tuesday on the New York Mercantile Exchange. On Thursday, crude prices hovered around $115.

"Recent news that Russian oil production dropped by 0.9 per cent in the first quarter of 2008, the first year-over-year decline in a decade, set off another wave of concern over supplies to meet growing emerging-market demand," Mohr said.

McTeague said consumers are adjusting to higher fuel costs by cutting back spending in other areas such as clothing and consumer goods. Many, worried about the slowing economy, have stopped looking to buy houses.

"A big real estate office next to me, one of the largest in the country, says they've seen an across-the-board slowdown in the past eight weeks."

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